Thursday, 13 October 2016

Model Law on Cross-Border Insolvency comes to the rescue for foreign representative seeking funds

On Friday 7 October 2016, McCullough Robertson successfully obtained orders on behalf of a US Chapter 7 bankruptcy trustee, requiring payment to her of money held by the Public Trustee of Queensland (Public Trustee) on behalf of a US bankrupt and her former husband.  As far as we know, this is the first time that the Model Law on Cross-Border Insolvency (Model Law) has been used in Australia to obtain an order allowing the repatriation of funds to a foreign representative that are not the foreign debtor’s assets.

Mr and Mrs Digrigoli reside in California and have lived there most of their lives.  In 2011 Mrs Digrigoli filed for bankruptcy in California.  In 2012 they got divorced after 40 years of marriage.  During their marriage they acquired a property in Western Queensland.

In Australia, upon the bankruptcy of one of the owners, a joint tenancy is severed and the property becomes held as tenants in common.  The non-bankrupt then retains their share of the property and it does not form part of the estate of the bankrupt.  However, under US bankruptcy law, property acquired jointly during marriage (referred to as ‘community property’) forms part of the estate in bankruptcy.  After payment of fees and expenses of the bankrupt estate, the proceeds of the community property must first be applied to pay the married couple’s joint debts, after which the remainder, if any, is then divided equally between the estate and the non-bankrupt spouse.

In February 2013, the local Queensland council sold the property to recover unpaid rates.  Relying on her right to community property, the bankruptcy trustee asked the council to pay the balance proceeds of sale to her, but the council ignored her request.  Accordingly, the bankruptcy trustee obtained an order from the Bankruptcy Court in California requiring the council to pay the funds to her.  Despite the order, the council refused to pay over the funds and paid them to the Public Trustee.

Exasperated by the head in the sand attitude of the council, the bankruptcy trustee asked us whether we could assist.  Frustratingly, following a number of written requests from our firm and a comprehensive explanation of relevant US Bankruptcy law, the Public Trustee also refused to pay the proceeds to the bankruptcy trustee, refusing to recognise the US Bankruptcy or that the bankruptcy trustee had any right to the funds.

Not to be defeated, we recommended that we seek recognition of the US bankruptcy as a ‘foreign proceeding’ under the Model Law and then seek orders requiring the Public Trustee to pay the funds to the bankruptcy trustee.  In doing so, we agreed to cap our fees to ensure this action remained commercially viable for our client.

Upon recognition of a foreign proceeding, under article 21 of the Model Law, the court can grant any appropriate relief, including entrusting the:
(a) administration or realisation (article 21(1)(e)); or
(b) distribution (article 21(2)),
of the debtor’s assets to the foreign representative (in this case the bankruptcy trustee).

The issue that we faced was that (as far as we could determine) all the previous Australian authorities that had entrusted the administration, realisation or distribution of assets to a foreign representative had only done so in respect of the foreign debtor’s property, and not the property of another party, as was required in this case.

Happily, the court agreed with our argument that the circumstances of the matter meant that ‘appropriate relief’ included entrusting all the funds held by the Public Trustee, including the portion of the funds that under Australian law would remain Mr Digrigoli’s, to our client.

Click here to see a copy of the recognition order and the order requiring payment of the funds by the Public Trustee.

Scott Butler

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